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The Senate Committee on the Judiciary held a hearing Tuesday regarding possible legislation granting bankruptcy judges the power to require foreclosure mediation between banks and homeowners.
Sen. Sheldon Whitehouse (D-R.I.) railed against the Home Affordable Modification Program, or HAMP, for falling short of the Obama administration's early targets, and lenders for improperly filing and executing foreclosures. Whitehouse said one possible solution would be bankruptcy court loss-mitigation programs that put homeowners in touch with their bank.
"Tragically, these foreclosures are often unnecessary, indeed often not even in the mortgage holder's best interests, but they are driven forward by conflict-ridden bureaucratic machinery that lacks the most basic American failsafe: the chance to talk to a responsible human being who can make an actual decision," Whitehouse said. "The bankruptcy court loss-mitigation programs won't save every home, but they can help countless frustrated homeowners cut through the bureaucratic nightmare and get answers to their modification requests."
Robert Drain, a judge for the U.S. Bankruptcy Court for the Southern District of New York, testified that half of the mediations that take place in his court's loss-mitigation program end in an agreement, often a modification. The other half, he said, at least give the homeowner a clear understanding for why they're losing their home.
Drain added that lenders, too, have pushed participation in the programs as often the outcome clears servicers from future litigation from investors. Of the 2,000 loss-mitigation requests by homeowners, Drain oversaw, only 90 were objected to by the banks.
"By passing legislation expressly recognizing the benefits of home mortgage mediation programs, Congress would endorse a solution to one of the most vexing problems of the financial crisis by encouraging bankers to return to being bankers," Drain said.
Mediation programs have cropped up statewide in New York, Rhode Island, Vermont and Florida. County courts serving larger cities such as Chicago, Philadelphia, Cleveland and Pittsburgh have done the same, and smaller cities such as Louisville, Ky., and Sante Fe, N.M., followed suit.
Still, not everyone is sold. Andrew Grossman, the visiting legal fellow at The Heritage Foundation, said it is hard to pinpoint what additional benefit homeowners can receive from programs that have proven only modest success so far. He added that more loss-mitigation programs would push lenders to raise premium risk prices, making mortgages less affordable in the future.
But Grossman also added that the real risk from such a broad-ranging program is that further delays to the foreclosure process would only delay a recovery at this point.
"Further hurdles to resolving defaulted mortgages will delay the bottoming out of the housing market, at great cost to the economy," Grossman said in testimony.
Foreclosure timelines in New York and Florida continue to be the longest in the nation due to the sizeable backlog of cases in the system. RealtyTrac Senior Vice President Rick Sharga told HousingWire that some 500,000 cases are still pending in Florida courts.
Drain admitted to the problems with overbearing legislation, but he said such programs are vital to sorting out the foreclosure issue.
"Since I am not testifying today on behalf of any group, I can tell you that my personal view of legislation is that less is best," Drain said. "Even if you share that view, however, and perhaps especially if you share it, enabling homeowners and lenders to negotiate the resolution of their loans is a good idea."
Write toJon Prior.
Follow him on Twitter: @JonAPrior

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